Driving sustainable investment practices

Scaling up finance for climate solutions demands broad collaboration from the public and private sectors

This summer, extreme weathers, such as scorching heat waves or flooding, have been reported in many parts of the world, underlining the need to fund climate solutions.All this requires coordinated and determined actions across the public and private sectors and joint efforts from investors and industries.

According to Climate Policy Initiative's estimates, the needed funding ranges from $3 trillion to $6 trillion per year until 2050, while the estimated level of actual investment flow in 2022 was $850 billion to $940 billion — no more than 20 percent of what is needed.

Closing the huge finance gap for climate solutions is not just a figure, but innovations, and synergy from public and private capitals.

Although both public and private climate finance is increasing, according to Climate Policy Initiative, the growth rate of private climate finance was slower (4.8 percent) than that of the public sector (9.1 percent). It is natural for public finance to invest in public goods, particularly in assets with environmental externalities; but these are very limited in scale. There is a huge demand to unlock private capital pools for energy transition and renewables.

The G7 leaders' summit this year emphasized on the mobilization of both private and public resources, and the important role that international financial institutions and multilateral development banks could play.

A natural model of public finance is government fund. Private capital investors may perceive climate investments as carrying high risk, due to uncertainties of the business model, long-time horizon of returns, and the introduction of new technologies. Government fund can play a more important role through de-risk, co-investment or other arrangements to ultimately mobilize private capital to close the gap in climate finance.

Sovereign investment funds, such as pension funds and sovereign wealth funds, could also play a vital role, according to a recent study by the Natural Resources Defense Council and its partner China International Capital Corporations and Storebrand Asset Management for the China Council for International Cooperation on Environment and Development. In 2020, the total assets under management of global public pension funds and sovereign wealth funds surpassed $30 trillion, equivalent to one-third of the global GDP.

Large asset owners such as sovereign funds, staying at the upstream of capital flows, could have a larger impact on the capital market. Closely connected with their investors and beneficiaries, large asset owners have the ability not only to channel capital into green fields by transitioning their own portfolios, but also to engage with asset managers, and other parties in the capital market to guide more investments to flow into climate solutions.

The green actions of these funds would not only serve as a role model to other private funds, but also convey a clear policy signal to the market that "green is the future" and would drive even more market players to invest in green.

China's National Social Security Fund is making meaningful progress in this regard. The Industrial Investment Guidelines of NSSF issued last September clearly stated that the social security fund should increase investment in funds and projects themed on environmental, social and governance (ESG), and incorporate ESG and other factors into the due diligence and evaluation system of industrial investment. Last November, the NSSF launched an invitation for bids from domestic mutual fund companies to manage ESG investment products, with over 20 leading firms participating.

This represents just one example of the proactive steps the NSSF has taken to drive sustainable investment practices. By leveraging its scale and influence, the NSSF is sending a signal to channel capital into sustainable fields, which demonstrates the immense power asset owners can wield to catalyze positive change through their investment decisions and engagement.

The finance sector can align actions with the industry through active ownership.

In recent years, we have seen a trend of large asset owners and asset managers using their voting power and influence to push companies into becoming cleaner, which is known as active ownership, or stewardship. There are multiple ways to implement such stewardship: in addition to voting, engagement and dialogue with companies can also push them to improve their ESG performance.

Stewardship can also play a role in transition finance. Financial institutions can actively engage with companies in their target setting, transition plan development and implementation. Through such stewardship, financial institutions can influence real economy and align with real economy companies in climate actions.

The author is the director of the China Environmental Law & Governance Project at the Natural Resources Defense Council. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.